Taking the ‘demon’ out of demonetisation

Despite the 'shock and awe' effect it's had, demonetisation is a very old trick from a very old book

Some have called it radical, others have attributed such adjectives as brave and effective. While the recent demonetisation move might be all that, the one thing it certainly isn’t is ‘new’. In fact, while demonetisation has mostly been used in context of geopolitical realignments, its history is as old as currency itself. Although only rarely have currencies been demonetised for reasons other than the currencies being outdated, there is precedent throughout recent history for such a move.

Lessons from the past

The first probable instance was the paper money that was issued during the American civil war. To sustain their economy the ‘Confederacy’ or the group of breakaway southern states, printed paper money in large sums.

While the currency was intended to be legal tender in the post war country, their defeat in the war meant the Confederate currency, just like the country itself had a premature end.

500 dollar denomination of the Confederate currency

In the more recent past, Britain has done it several times to several denominations for restructuring and ease of use, including in 1971, 1980 and the early 1990s.

But we don’t always have to look beyond the sea for such a move. While most Indians seem to have forgotten, India has twice demonetised its largest currency notes in the past. First was in the pre-independence years in 1946, when the government demonetised both the Rs 1,000 and Rs 10,000 notes. New notes for these denominations weren’t reintroduces until almost a decade later in 1954. However, perhaps the instance that bears the most resemblance to the country’s present push came in 1978 when the Janata Party government (the ideological predecessor of the current BJP) demonetised the country’s three largest currency denominations – Rs 1,000, Rs 5,000 and Rs 10,000 to weed out increasing fake currency and black money.

Former Indian PM Morarji Desai

The most recent instance internationally was in 2011, when the Italian government under Mario Monti declared the Italian lira as only redeemable until 6th December of that year. While the lira has not been legal tender ever since the introduction of euro, this move prematurely ended lira’s validity for exchange at banks in Italy. The move has recently been termed unlawful and the process is on to chart out necessary measures.

The numbers behind the move

But perhaps no precedent can match up in scale to the Indian government’s current move which will render a staggering Rs 14.18 lakh crore (0r $210 billion) illegal. However, despite the ructions among the masses, the move has reportedly already lead to over $30 billion (or close to 15 % of the total in Rs 500 and Rs 1,000 notes) being deposited in bank accounts and thereby coming directly under the tax-net.